Missing the forest for the trees

Gavyn Davies at the FT writes about what´s becoming one of the most noxious views: That a “Great Moderation” is compatible with a “Great Stagnation”:

Before the financial crash in 2008, it was frequently claimed that the developed economies had permanently ended the cyclicality of prior eras. In fact, a name – the “Great Moderation” – was invented to describe the stable period from 1984-2008, when the variability of real GDP growth and inflation both fell markedly. Recessions did occur during these years, but they represented short and fairly shallow punctuations between extended periods of moderate expansion.

That was before the Great Recession of 2008-09, by far the deepest since the 1930s. The financial crash made the term “Great Moderation” seem hubristic, if not absurd, and for a while it was banished from the lexicon. But now it is back [in the guise of “Great Moderation”2.0 (GM2.0)]

This remark is outlandish:

The return to low volatility patterns has fuelled suggestions that the underlying causes of GM 1.0 have now re-asserted themselves, in which case the outlook would be for a further prolonged period of moderate expansion in output, with low inflation…Graph 3 shows that the present expansion would have to run for about 12 more quarters before it would match the median expansion during GM 1.0.

What almost everyone forgets is that the success of the GM 1.0 was grounded on two factors: One, on the Fed having attained nominal stability, and two, on having established the ‘proper’ initial level of nominal spending from which to progress.

As the chart indicates, only the first condition holds at present. There has been no effort to regain a higher trend level. To exonerate monetary policymakers from responsibility we are in an inevitable “Great Stagnation” (A “Great Moderation” within a “depressed” state).

Missing Forest

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